The Line We Must Draw

Macro Contracts Are Derivatives. Micro Contracts Are Gambling. The Hard Question Is What Happens in Between.

“The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.”

— F. Scott Fitzgerald

Two Markets Wearing One Mask

The prediction market industry is not one market. It is two markets operating under a single regulatory classification, and the failure to distinguish between them is the source of every unresolved question in the current debate.

The first market consists of macro-level event contracts — elections, championships, major economic indicators — that reference outcomes to which identifiable commercial enterprises have genuine balance-sheet exposure. A hotel chain’s revenue varies with which city hosts the Super Bowl. A defense contractor’s earnings depend on which party controls the White House. An energy company’s regulatory burden shifts with election outcomes. These exposures are real, material, and hedgeable. Contracts referencing these events serve a commercial function that is structurally identical to the weather derivatives market: bilateral risk transfer between commercial entities with opposing exposures, producing price discovery as a byproduct of genuine hedging activity. These are derivatives. They have always been derivatives. The commercial hedging justification that the prediction market industry invokes is not manufactured — it is genuine, demonstrable, and economically significant.

The second market consists of micro-level proposition contracts — individual player statistics, in-game occurrences, specific performance metrics — that reference outcomes to which no commercial enterprise has any traceable exposure. No company’s balance sheet moves because a quarterback throws for 287 yards instead of 312. No institutional hedger has a position that requires the opposite side of a contract on a running back’s rushing total. These contracts serve no commercial hedging function, produce no price-discovery value that licensed sportsbooks do not already provide with greater liquidity, and are uniquely vulnerable to manipulation by individual participants who can influence their own statistics. These are proposition bets. They are the same products that state-licensed sportsbooks offer under the label “props,” and they generate the highest operator margins in the sports wagering industry for precisely the reason that makes them most dangerous to retail consumers: the house edge is largest where the bettor’s informational disadvantage is greatest.

The numbers make the distinction unavoidable. Eighty-nine percent of Kalshi’s $263.5 million in 2025 fee revenue came from sports contracts. Polymarket, which built its brand on presidential election forecasting, saw sports rise from 17 percent of volume in November 2024 to its single largest category by February 2025. Robinhood traded twelve billion prediction market contracts in 2025, with sports dominating. In the licensed sportsbook industry, parlay and proposition bets represent 34 to 56 percent of handle and generate the highest operator margins — DraftKings reported 34.1 percent of handle in parlays, FanDuel 42.7 percent, and Illinois recorded 56 percent of all DraftKings bets as parlays in early 2024. If prediction market sports contracts follow the same composition — and the products are functionally identical — then somewhere between 31 and 49 percent of the entire industry’s revenue comes from Tier Three contracts for which no commercial hedging justification exists.

The contracts that can credibly claim a derivatives function — political, economic, and macro-level event outcomes — likely account for less than fifteen percent of total industry revenue.

The industry defends its derivatives classification by pointing to the strongest fifteen percent of its product line. It earns its revenue from the rest. The line we must draw separates these two markets and regulates each for what it actually is.

A Trillion-Dollar Question

The urgency of drawing this line is not theoretical. Kalshi’s trading volume grew from $183.3 million in 2023 to $1.9 billion in 2024 to $24.2 billion in 2025 — a compound trajectory that no financial product in modern history has matched. The company raised $1 billion in funding and achieved an $11 billion valuation. Polymarket grew from $9 billion in volume in 2024 to more than $40 billion in 2025. Robinhood’s prediction market business generated $300 million in annualized revenue in its first year, and CEO Vlad Tenev called it the “fastest-growing business in the history of our company.” Interactive Brokers launched ForecastTrader. Webull, Crypto.com, and multiple other platforms entered the market.

Industry analysts at Eilers & Krejcik project that prediction market volume will reach one trillion dollars annually by the end of the decade. Platform revenues are projected to grow fivefold to $10 billion or more by 2030.

These are not speculative estimates from market boosters — they are consensus projections from the same analysts who correctly forecast the trajectory of the licensed sportsbook industry after Murphy v. NCAA.

The scale matters because the regulatory framework that governs prediction markets at $40 billion in volume will govern them at $1 trillion.

The classification decisions being made now — in CFTC rulings, in federal court opinions, in state attorney general enforcement actions — will determine whether a trillion-dollar industry operates as a regulated derivatives market with institutional participants and genuine commercial hedging, or as a national gambling platform that bypasses every state consumer protection framework in the country by calling itself something it is not.

What History Teaches About National Gambling

The prediction market industry argues that retail access to event contracts is a matter of individual liberty and market efficiency. The argument has intellectual pedigree. It also has a historical record, and the record is not kind.

After Murphy v. NCAA struck down the federal ban on sports betting in 2018, state-licensed sportsbook handle in the United States grew from approximately $4.9 billion in 2017 to more than $165 billion in 2025, with cumulative handle exceeding $600 billion over the period. The expansion was the most rapid scaling of legalized gambling in American history.

The results are now measurable. Problem gambling rates rose approximately 30 percent between 2018 and 2021 before returning to 2018 baseline levels — a pattern consistent with an initial surge in vulnerable populations followed by the self-selection of the most susceptible individuals into treatment or financial collapse. More than 50 percent of young adults exposed to sportsbook advertising reported that it made them more likely to gamble.

The international evidence is more extensive and more damning. Australia, which legalized online gambling nationally, now reports $31.5 billion in annual gambling losses. Research consistently finds that 67 to 89 percent of electronic gaming machine users exhibit at-risk or problem gambling behavior. The United Kingdom’s experience with fixed-odds betting terminals — which allowed stakes of up to £100 every 20 seconds — produced 176,000 identified problem gamblers before Parliament reduced the maximum stake to £2 in 2019. The Netherlands legalized online gambling in October 2021 and within three years saw youth gambling accounts increase by 340 percent, aggressive marketing by licensed operators, and a finding by the national gambling authority that 68 percent of problem gamblers had never been contacted by the operators legally required to identify them. The Dutch market was widely described as a regulatory failure.

In every jurisdiction that legalized gambling nationally, the same pattern emerged: rapid market growth, intense marketing to retail consumers, rising problem gambling rates, and eventual regulatory course correction — but only after the harm had been done to the most vulnerable populations.

The prediction market industry is replicating this pattern at accelerated speed. The mobile-first platforms, the gamification features, the push notifications, the countdown timers, the leaderboards — these are not innovations. They are the same behavioral engineering tools that drove problem gambling in Australia, the UK, and the Netherlands, deployed through a new regulatory channel that offers fewer consumer protections than any of those jurisdictions provided.

The Exception That Proves Nothing

There is one jurisdiction where national gambling legalization did not produce a public health catastrophe. Singapore opened two integrated resorts in 2010 — Marina Bay Sands and Resorts World Sentosa — with a regulatory framework so restrictive that it functioned as a controlled experiment in managed access. The government imposed a S$150-per-day entry fee for citizens and permanent residents. It established a National Council on Problem Gambling with statutory authority. It created a comprehensive self-exclusion and family-exclusion framework. It prohibited casino advertising targeting domestic residents.

The results were remarkable. Problem gambling prevalence dropped from 2.6 percent to 0.9 percent over the decade following legalization. Only 2.7 percent of Singapore’s adult population visited the casinos. The entry fees generated hundreds of millions in revenue directed to social services. The casinos remained commercially viable because their business model targeted international tourists and high-net-worth visitors, not domestic retail consumers.

The Singapore example is instructive, but it proves the opposite of what the free-access argument requires. Singapore succeeded precisely because it rejected the premise that retail consumers should have frictionless access to gambling products. The entry fee, the self-exclusion framework, the advertising prohibitions, and the institutional design all served a single purpose: protecting domestic retail consumers from a product that the government understood would harm them if access were unrestricted. Singapore did not prove that national gambling is safe. It proved that national gambling can be managed — but only through restrictions so severe that they would be unrecognizable to the prediction market platforms currently offering NFL prop bets through mobile apps with $1 minimum trades and no deposit limits.

The Harm Calculus

This brings us to the hardest question in the prediction market debate, and the one that the industry has systematically avoided answering: even if retail participation improves price discovery and market liquidity for macro-level event contracts, does the benefit of that improvement exceed the documented harm to retail consumers who cannot control their gambling behavior?

The clinical literature is unambiguous. The DSM-5 classifies gambling disorder alongside substance use disorders because the neurological mechanisms are identical: dopamine release in reward pathways, tolerance requiring escalating stakes, withdrawal symptoms, loss-chasing behavior driven by variable-ratio reinforcement schedules, and continued gambling despite catastrophic consequences. Problem gambling affects approximately 2.5 million American adults at the severe level and five to eight million at milder levels.

Annual social costs range from $7 billion to $14 billion. Twenty percent of problem gamblers file for bankruptcy. The World Health Organization estimates that roughly five percent of the million annual global suicides are gambling-related. In the UK, problem gamblers are 9 to 15 times more likely to attempt suicide than the general population.

The European Securities and Markets Authority’s experience with binary options and contracts for difference provides the closest regulatory analogue. ESMA found that 74 to 89 percent of retail accounts trading CFDs lost money.

The losses were not distributed randomly — they were concentrated among the least sophisticated retail participants, while a small number of professional traders consistently profited.

ESMA’s response was categorical: binary options were prohibited entirely for retail investors across the European Union, and CFDs were subjected to mandatory leverage limits and loss disclosure requirements. The European regulators did not ask whether retail participation improved price discovery. They asked whether the demonstrated harm to retail consumers justified restricting access. The answer was yes.

The prediction market industry has produced no evidence that the harm calculus differs for its products.

It has not published studies demonstrating that retail prediction market participants lose money at rates meaningfully different from the 74 to 89 percent loss rate that ESMA documented for comparable binary products. It has not funded research into problem gambling among prediction market users. It has not offered to implement the disclosure requirements, position limits, or access restrictions that ESMA imposed. It has, instead, argued that its products are derivatives, not gambling — and that the consumer harm associated with gambling is therefore someone else’s problem.

The argument is circular.

If the products are derivatives because they serve a commercial hedging function, then the commercial hedging function should be the business. But the business is retail sports betting. And if the business is retail sports betting, then the consumer harm associated with retail sports betting is the industry’s problem, regardless of which regulatory label it prefers.

The Retail Access Question

This series has argued, and continues to argue, that macro-level event contracts on elections, championships, and major economic indicators are legitimate derivatives with genuine commercial hedging applications. But an institutional-only market for these contracts would be the wrong answer — not because the institutional case is weak, but because the informational case for retail participation in Tier One and Tier Two contracts is strong enough to overcome the consumer protection concerns that dominate the Tier Three analysis.

The case for retail participation in macro-level prediction markets is not marginal.

It is foundational to the product’s core informational value. Philip Tetlock’s superforecasting research demonstrated that aggregated probabilistic judgments from diverse, independently motivated participants systematically outperform expert consensus.

The Iowa Electronic Markets, operated since 1988, showed that small-stakes retail prediction markets outperformed polls in forecasting election outcomes. The 2024 presidential election provided a dramatic real-time demonstration: Polymarket’s election contracts, driven overwhelmingly by retail participants, produced probability estimates that diverged sharply from polling aggregates and proved substantially more accurate.

The informational value of political prediction markets depends on the aggregation of distributed political knowledge — local conditions, demographic shifts, enthusiasm gaps, turnout dynamics — that no institutional participant, however sophisticated, can replicate. An election contract market limited to hedge funds and corporations would lose the very feature that makes prediction markets valuable.

The same logic applies, with somewhat less force, to Tier Two event-specific contracts.

Game-level outcomes in major sporting events carry informational content that is relevant to a broad range of commercial and investment decisions. A Tier Two contract on whether the Super Bowl exceeds a certain total score has implications for advertising effectiveness, viewership models, and media valuations. Retail participants who follow sports with granular expertise contribute genuine informational value to these markets. The commercial nexus is attenuated relative to Tier One, but it is not absent, and the price discovery function benefits from the breadth of participation.

The critical distinction is that retail participation in Tier One and Tier Two contracts can be made safe through proper regulation. These contracts reference macro-level or game-level events — outcomes that are publicly observable, difficult to manipulate, and that settle over timeframes long enough to permit informed analysis rather than impulsive wagering.

The behavioral engineering that makes Tier Three contracts dangerous — the rapid-fire settlement of individual player statistics, the dopamine cycle of bet-settle-bet within a single game, the variable-ratio reinforcement schedules that replicate slot machine mechanics — is structurally absent from macro-level event contracts.

An election contract that settles in November does not produce the compulsive trading behavior that a contract on a quarterback’s passing yards in the second quarter produces. The product is different. The risk is different. The regulatory response should be different.

Tier Three is a different matter entirely. Individual player proposition contracts — yards rushed, points scored, assists recorded, in-game statistical occurrences — have no commercial hedging function, no unique price discovery value, and no informational content that licensed sportsbooks do not already provide with greater liquidity and transparency.

These contracts are gambling by every functional measure: binary, cash-settled, rapid-cycle, and consumed almost exclusively by retail speculators seeking entertainment rather than hedging commercial exposure. They belong under the jurisdiction of state gaming regulators who have centuries of institutional expertise in managing exactly these products.

The question is not whether Tier Three contracts should exist — Americans clearly want them — but whether they should exist on CFTC-regulated platforms that bypass every state consumer protection framework, or on state-licensed platforms that provide the deposit limits, self-exclusion databases, advertising restrictions, and problem gambling interventions that the clinical literature demonstrates are necessary.

The Rules That Follow

The framework proposed below reflects this analysis. It draws the line between derivatives and gambling not at the boundary between prediction markets and traditional futures, but at the boundary between contracts that serve a commercial or informational function and contracts that replicate sports wagering. It permits retail participation in Tier One and Tier Two contracts — subject to consumer protections calibrated to the risk profile of each tier — and relegates Tier Three proposition contracts to the state-licensed gaming operators who have the institutional expertise and statutory mandate to regulate them.

Rule 1: The Tiered Commercial Nexus Test

Amend CEA Section 5c(c)(5)(C) to establish a tiered “commercial nexus” framework for all event contracts listed on a Designated Contract Market.

Tier One encompasses macro-level event contracts — elections, championships, major economic indicators — where the CFTC certifies that identifiable commercial participants have genuine, opposing economic exposures sufficient to sustain bilateral price discovery. These contracts are regulated as derivatives under full CFTC authority. Retail participation is permitted subject to the consumer protection guardrails of Rule 3 below. The retail access determination reflects the empirical finding that prediction market informational value derives significantly from the aggregation of distributed knowledge across a broad participant base, and that restricting these contracts to institutional-only markets would diminish the price-discovery function that justifies their existence.

Tier Two encompasses game-level and event-specific contracts where some commercial nexus exists but is attenuated — individual game outcomes, event milestones, and contest-level results that do not rise to the macro level but that carry informational content relevant to commercial decision-making. Retail participation is permitted subject to enhanced requirements: mandatory position limits for retail participants, mandatory disclosure that the contract has not been certified as serving a macro-level commercial hedging function, compliance with the full consumer protection guardrails of Rule 3, and a requirement that the contract demonstrate informational value distinct from the price signals already produced by licensed sportsbook markets.

Tier Three encompasses individual player statistics and proposition contracts — yards rushed, points scored, assists recorded, time of possession, individual performance metrics, specific in-game occurrences, and any similar statistic that constitutes the subject matter of a traditional proposition bet.

These contracts are not eligible for listing on any Designated Contract Market. They serve no commercial hedging function — no commercial enterprise has a balance-sheet exposure traceable to an individual player’s statistical performance in a single game. They produce no price-discovery value that is not already served, with greater liquidity and transparency, by the licensed sportsbook market. They are uniquely vulnerable to manipulation by individual participants who can influence their own statistics. And they exhibit the rapid-cycle, variable-ratio reinforcement characteristics that the clinical literature identifies as the primary drivers of compulsive gambling behavior.

Tier Three contracts are not prohibited. They are relocated. State-licensed gaming operators may offer these products under the same regulatory frameworks that govern sports wagering: state gaming commission oversight, mandatory deposit limits, self-exclusion database integration, age verification, advertising restrictions, responsible gambling programs, and the full suite of consumer protections that states have developed through decades of experience regulating functionally identical products.

The CFTC’s derivatives authority provides no coherent basis for classifying a contract on whether a running back gains 76 or 74 yards as anything other than what it is — a proposition bet — and the consumers who trade these products deserve the protections that state gaming regulators, not federal derivatives regulators, are equipped to provide.

Rule 2: Retail Protection Guardrails

Require, through amendment to CFTC Part 38, that any Designated Contract Market offering Tier One or Tier Two event contracts to retail participants implement the following consumer protections, calibrated to bring CFTC-regulated platforms into parity with the consumer protection standards that state gaming regulators apply to comparable products:

Deposit limits. No retail participant shall deposit more than $500 per day or $5,000 per month without completing an enhanced suitability determination demonstrating financial capacity to absorb potential losses.

Self-exclusion integration. Every DCM offering event contracts shall integrate with state self-exclusion databases and honor all state-issued self-exclusion orders. Participants who have self-excluded from state-regulated gambling shall be automatically excluded from event contract trading.

Cooling-off periods. Deposit limit increases shall be subject to a 72-hour cooling-off period. No increase shall take effect until the waiting period has elapsed.

Loss disclosure. Every DCM offering event contracts shall prominently display, on its homepage and in every marketing communication, the percentage of retail accounts that lost money in the preceding twelve months — modeled on ESMA’s CFD disclosure requirement, which compelled platforms to display that 74 to 89 percent of retail clients lose money.

Advertising restrictions. Event contract advertising shall comply with the advertising standards applicable to licensed sportsbooks in the state where the advertisement is displayed. No event contract advertising shall target individuals under the age of 21.

Age verification. The minimum age for event contract participation shall be 21 in states where the minimum gambling age is 21, and 18 in states where the minimum gambling age is 18. CFTC-regulated platforms shall not apply a lower age threshold than state gaming law requires for equivalent products.

Rule 3: Congressional Clarification of Section 12(e)

Amend CEA Section 12(e) to establish concurrent jurisdiction. The CFTC retains exclusive authority over market integrity, surveillance, clearing, and settlement of Tier One and Tier Two event contracts.

States retain concurrent jurisdiction over consumer protection, advertising, age verification, self-exclusion, and taxation of event contracts purchased by their residents.

States retain exclusive jurisdiction over Tier Three proposition contracts, which fall outside CFTC derivatives authority and within traditional state gaming regulation.

This dual-jurisdiction model mirrors securities regulation, where the SEC governs market structure and state regulators govern broker-dealer conduct and consumer complaints.

The Line

In the 1890s, bucket shops offered ordinary Americans binary bets on commodity prices with no underlying delivery obligation. The shops proliferated. Retail losses mounted. Congress responded with the Grain Futures Act of 1922, requiring that all futures trading occur on regulated exchanges under federal supervision. The bucket shops disappeared. The regulated futures markets became the most liquid, most transparent, and most efficiently priced derivatives markets in the world.

The lesson is not that retail speculation should be prohibited. It is that retail speculation should be regulated — by the right regulators, with the right tools, at the right level of the product hierarchy. The CFTC has expertise in derivatives market integrity and should oversee the macro-level and game-level event contracts that function as derivatives. State gaming commissions have expertise in problem gambling and should oversee the proposition contracts that function as sports wagering. Neither regulator should be asked to do the other’s job.

The prediction market industry will reach one trillion dollars in annual volume before the end of this decade. The line we draw now — between the contracts where retail participation enhances price discovery and the contracts where retail participation replicates gambling, between the products that belong on CFTC-regulated exchanges and the products that belong under state gaming authority — will determine whether that trillion-dollar industry serves the commercial and informational functions its advocates describe, or whether it becomes a regulatory arbitrage that enriches platforms at the expense of the retail consumers it claims to serve.

Dostoyevsky understood the gambler’s compulsion better than any clinical researcher. He also understood recovery. In 1871, he stopped gambling, and the final decade of his life produced The Brothers Karamazov. But he could not have stopped without Anna — without someone who understood his weakness better than he understood it himself and who had the authority to impose limits he would not impose on himself. The framework proposed here does not banish the gambler from the market. It ensures that the gambler enters the right market — the one with the protections he needs, regulated by the authority that knows how to provide them. The CFTC is not Anna. The states are. The rules we need are the rules that let each regulator do what it does best.